National View: How the changing economy has slowed economic growth in the Northeast and Mid-Atlantic

Thursday

Aug 21, 2014 at 8:30 AM

According to data on real gross state product released by the U.S. Bureau of Economics, the growth rates of the Northeast and Mid-Atlantic regions have lagged behind other regions of the U.S. Growth for the U.S. over this period was 8.4 percent versus 6.4 percent for the Northeast and 5.6 percent for the Mid-Atlantic region. The Mid-Atlantic, defined as Delaware, Maryland, New Jersey, New York, Pennsylvania and the District of Columbia, had the slowest growth rate; consequently, it has slipped from first place in real gross domestic product per capita in 2009 ($55,786) to second place in 2013 ($57,866) and the Northeast has moved up from second to first ($55,312 to $57,986). National real GDP per capita was $46,706 in 2009 and $49,115 in 2013 according to the BEA.

Stacie Beck

According to data on real gross state product released by the U.S. Bureau of Economics, the growth rates of the Northeast and Mid-Atlantic regions have lagged behind other regions of the U.S. Growth for the U.S. over this period was 8.4 percent versus 6.4 percent for the Northeast and 5.6 percent for the Mid-Atlantic region. The Mid-Atlantic, defined as Delaware, Maryland, New Jersey, New York, Pennsylvania and the District of Columbia, had the slowest growth rate; consequently, it has slipped from first place in real gross domestic product per capita in 2009 ($55,786) to second place in 2013 ($57,866) and the Northeast has moved up from second to first ($55,312 to $57,986). National real GDP per capita was $46,706 in 2009 and $49,115 in 2013 according to the BEA.

Private sector real GDP has expanded 9.9 percent, whereas government real GDP has slightly contracted 1.3 percent nationwide according to the BEA. Government is an important sector in every region, comprising between 10 percent and 14 percent of gross regional product and not more prominent in the Mid-Atlantic relative to other regions. Moreover, it has contracted only modestly in the Mid-Atlantic (-1.5 percent) so this is not a major reason for the Mid-Atlantic's malaise.

More insight is gained from the BEA's breakdown of private goods-producing industries versus service-producing industries. Nationwide, growth has been stronger in goods-producing industries (11.8 percent) compared to service-producing industries (9.4 percent). This growth has largely favored the western and central regions of the country relative to the eastern regions, except for the Far West, which grew only 3.4 percent. However, even among the eastern regions, the Mid-Atlantic region has performed poorly; its goods-producing industries shrank 0.6 percent compared to growth in Northeast (4.6 percent) and the Southeast (7.4 percent). Growth in service-producing industries has also favored the western and central regions. In the Mid-Atlantic, these industries have done better (8.0 percent) relative to the Northeast (7.6 percent) and Southeast (7.7 percent) but still below the national average.

Next we look at how growth fared with the most dominant industries: Manufacturing (12.0 percent share of GDP nationally), Finance, Real Estate, Insurance (20.1 percent), Professional and Business Services (11.6 percent) and Education and Health Services (8.5 percent). Professional/Business Services is a catchall category that includes legal services, temp agencies, scientific services, waste management, computer design, etc. For the Mid-Atlantic, Finance (24.5 percent share of gross regional product in 2009), Professional/Business Services (13.3 percent) and Education/Health Services (9.5 percent) are relatively more important than Manufacturing than for other regions but Manufacturing is still important (8.0 percent share of gross regional product in 2009).

The Mid-Atlantic's growth rate 2009-2013 has been best in Finance and Professional/Business Services (6.4 percent and 12.6 percent) relative to the national average (6.9 percent and 14.5 percent), the Northeast (5.2 percent and 15.3 percent) and Southeast (5.6 percent and 12.1 percent). The Mid-Atlantic's Education/Health Services growth (4.8 percent) was below average both nationally (6.3 percent) and regionally (Northeast's 5.4 percent and Southeast's 6.0 percent). The real outlier is manufacturing, however. The Mid-Atlantic's manufacturing sector shrank -5.5 percent relative to the 12.9 percent growth over 2009-2013 nationally, and the 4.2 percent growth in the Northeast and 11.3 percent growth in the Southeast.

The bottom line is that there has been a nation-wide shift toward goods-producing industries whereas the comparative advantage of the Northeast and Mid-Atlantic regions is in service-producing industries. This shift is possibly due, in part, to the gradual depreciation of the trade-weighted value of the dollar since 2002, notwithstanding its temporary spike during the financial crisis of 2008-2009 (Federal Reserve Bank of St Louis). Such a depreciation typically benefits export-oriented industries in the interior of the country (albeit with long and variable lags) relative to the coasts, which are more import-dominated.

However, this is not a complete explanation for the Mid-Atlantic region's slow growth. Even the Northeast, Southeast and Far West regions have shared somewhat in the growth of goods-producing industries, including manufacturing, whereas in the Mid-Atlantic region these industries contracted. This loss has not been offset by regional growth in service producing industries which have hovered around the national average. Causes specific to goods-producing industries, i.e., manufacturing, and the Mid-Atlantic region, explain this contraction.